Step Change

Difficult at the best of times, measuring a company's carbon footprint is about to get even more so.Jason Karaian, CFO Europe MagazineFebruary 4, 2008

In the low-lying coastal region of England's East Anglia, climate change is already afoot. At Anglian Water, the £919m (€1.2 billion) utility that serves the region, more than 85% of the incidents that its wastewater emergency team was called on to address in the last fiscal year were weather-related, "far more than in previous years," the company reports. Should the trend continue — and the company fears it will — rising sea levels could eventually submerge many of Anglian Water's treatment works.

But the company reckons it can start taking steps now to prevent the worst effects of global-warming, according to Nirmal Kotecha, Anglian Water's head of supply chain management. "Doing nothing is not an option."

To this end, Anglian Water has pledged to reduce its carbon footprint — the shorthand term for a company's annual greenhouse gas emissions — by 50% by 2035, reversing the trend that saw its CO2 emissions double over the past 15 years. It's also looking externally to address the problem. Kotecha met with the company's 50 largest suppliers in January "to challenge them to work with us to reduce our collective footprint." By the end of the next fiscal year, in March 2009, its suppliers will need to report both the size of their carbon footprint and the measures they are taking to adapt to climate change if they want to continue doing business with the utility.

Walk the Talk
While it seems as if just about every company is doing something to tackle climate change these days, by addressing its entire supply chain Anglian Water is doing more than most.

Of course, utilities, oil companies and other energy-intensive firms have more experience measuring and managing emissions than banks, retailers and other companies that only recently started to publicise their carbon footprints. In the EU, large emitters have reported detailed CO2 data since at least 2005, when the union's emissions-trading scheme began. Expanding this exercise to include all of a company's direct emissions of greenhouse gases is "relatively straightforward," says Kotecha, "though it's not always easy to get all the numbers."

On the other hand, companies new to footprint measurement are not so confident. Craig Simmons, co-founder of Best Foot Forward, an Oxford-based consultancy that runs measurement training courses, says he's seeing "very little practical experience" at the companies he's been working with.

Despite this lack of experience, the number of companies reporting the size of their carbon footprints, regardless of industry, is growing fast. Last year, more than three-quarters of the world's 500 largest listed companies participated in the Carbon Disclosure Project, an annual emissions questionnaire sent out on behalf of more than 300 investment houses, up from less than half in 2003. (See "Sizing Up" at the end of the article.) Many companies are attracted to the PR benefits of disclosing this information voluntarily, though others cite the exercise as good preparation for the eventual expansion of emissions-reduction regulation at national and EU levels.

More generally, investors and analysts increasingly view carbon as a "proxy for the efficiency of processes," says Jochen Gassner, a director at 3C Consulting in Frankfurt. "That justifies a more strategic look at it."

Whatever the motivation, measuring a company's carbon footprint remains an inexact science. "You can drive a bus through many of the numbers that are reported," says Richard Sharman, lead partner in the carbon advisory group at KPMG in London. "Many companies, at best, try to measure their footprints too quickly and, at worst, use very poor data."

Because the exercise is largely voluntary, a host of competing standards and protocols for drawing up greenhouse-gas inventories makes the differences between IFRS and US GAAP seem quaint by comparison. From measurement methodologies such as the GHG Protocol to ISO 14064, "the term 'standard' is used very loosely," according to Michael Gillenwater, executive director of Greenhouse Gas Experts Network, a Washington, DC-based non-profit membership organisation. "Most of what's out there now — what people call standards or protocols — are either vague or non-prescriptive, or both." That said, the Carbon Disclosure Project advises respondents to use the GHG Protocol, giving it the most traction for businesses today.

Scope Creep
Despite the difficulty that firms have measuring their own carbon footprints, there is a growing consensus that emissions from any single company reveal only part of the story. When considering the overall carbon impact of a company, "direct emissions are often utterly trivial," asserts David Symons, director of corporate services at consultancy WSP Environmental in London.

Consider UK-based consumer goods group Reckitt Benckiser. In November, it announced an initiative to cut its "total" carbon footprint, including its upstream supply chain and the lifecycle emissions of its products. But the company reckons that its collective carbon footprint was 15m tonnes of CO2 in 2006, with the direct emissions from Reckitt Benckiser's own manufacturing processes accounting for less than 5% of the total.

Thus, if consumers become more carbon conscious or new regulations push up the cost of pollution, the effect on the cost and demand for Reckitt Benckiser's products will dwarf the measures that the company alone can take. In a similar vein, no matter how much Anglian Water reduces its own carbon footprint, if it can't also persuade key suppliers around it to cut their emissions, the resulting change to the climate may still leave its buildings under water.

Last year, a number of supply chain footprint programmes were launched. One group convened by the Carbon Disclosure Project — including Unilever, Tesco and Nestlé — will develop a standardised, centralised process for collecting carbon footprint data from suppliers. Another project, sponsored by the UK government and involving companies such as Cadbury and Coca-Cola, will draft standards to measure the lifecycle emissions of certain products.

These programmes represent the two main "philosophical approaches" to measuring supply chain emissions, says Gill Hall, director of climate change programmes at IBM in London. The former considers the environmental performance of supplier companies as a whole — a "gigantic task," in Hall's words — while the latter attempts to quantify the discrete emissions generated by individual products, merely a "staggering amount of work."

As a result, most companies are "simply lost," according to Philippe Spicher, director of Swiss research firm Centre Info. "They know they have to do something, but it's difficult and costly."

As one CFO involved in a long-running, much delayed footprint project confirms, it's tough to find "common ground" with competitors on measurement issues. Until there is industry-wide agreement, companies are reluctant to be the first to report their emissions, lest a rival should use a more lax method to make itself look greener. "It's not necessarily an impossible task," the finance chief sighs.

To facilitate the process, "the challenge for the carbon market is to find tools that are easy to understand and implement, even if they are less accurate," says Gassner of 3C Consulting. According to Tom Baumann, co-founder of Ottawa-based environmental consultancy ClimateCheck, a company that can measure its supply chain footprint within a 20% margin of error "is doing spectacularly."

One Step at a Time
When Anglian Water decided to get a rough idea of its supply chain's carbon footprint, it teamed up with a handful of fellow utilities and turned to Achilles, a supply chain management firm. "We look for systems that are relatively simple and nudge people towards reducing emissions without making value judgements," says Colin Maund, CEO of Achilles. After commissioning research from the Saïd Business School at nearby Oxford University, the firm identified a government-sponsored scheme in New Zealand, dubbed carboNZero, as the most appropriate for its aims. "Many of the other schemes were so complicated that only the biggest companies could ever attempt to use them," Maund notes.

Achilles will roll out the New Zealand–inspired system this year on behalf of Anglian Water and others. In addition to annual audits of the "effectiveness and honesty" of suppliers' carbon footprint reports, the firm will benchmark best practice and vet participants' plans for improvement. "As long as there is a management process to reduce emissions, that is about as much as we can reasonably expect at this stage," reckons Maund.

Even so, companies shouldn't expect investors to be satisfied for long. "It's dangerous to rely on just what the companies publish," says Spicher of Centre Info. He learned this recently when client Pictet asked for an assessment of the climate-change exposures of companies on the Geneva-based bank's investment radar. Finding little reliable, comparable information on supply chain emissions reported by companies, Centre Info developed its own metric called envIMPACT.

With the help of the Swiss Federal Institute of Technology, Carnegie Mellon University and others, the tool uses macroeconomic lifecycle assessments for hundreds of sectors, processes and products to measure around 2,000 global companies in terms of "carbon intensity units," or greenhouse-gas emissions per unit of revenue. In June, Société Générale issued a report on "European carbon winners and losers" that incorporated envIMPACT scores into its traditional financial ratings, bolstering a number of buy and sell ratings.

Although information reported through the Carbon Disclosure Project is improving, and Centre Info is running tests to see if it can use some of the data in its models, Spicher says that self-reported data on direct, and, particularly indirect, emissions remains patchy. "In an ideal world, we would not need our model," notes Spicher.

A similar rating system was recently developed by Innovest, a New York–based investment advisory firm. Called Carbon Beta, the measure also collects information from lifecycle assessment databases, arriving at an assessment of a company's net risk exposure to climate change relative to sector peers. In Europe, the shares of Carbon Beta leaders outperformed laggards by nearly 7% annualised, on average, over the past three years, according to Innovest. The firm's ratings universe currently covers 750 companies, each receiving a score from AAA to CCC, similar to credit-ratings terminology. In fact, last year, JPMorgan launched a corporate bond index for investment-grade companies with high Carbon Beta scores.

"Let's face it, these are guesstimates," says Pierre Trevet, a managing director at Innovest in San Francisco. "They are only surrogates, because nobody outside of a company can accurately assess its carbon footprint."

Carbon Curriculum
Corporate carbon disclosure needs to come a long way before Trevet and fellow analysts ditch their admittedly flawed models. For that to happen, experts say, companies need to improve the governance of footprint measurement projects, both to strengthen the internal collection and analysis of emissions data and to enhance co-operation with partners along the supply chain.

With this in mind, the Greenhouse Gas Management Institute — founded in October by Gillenwater of the Greenhouse Gas Experts Network and Baumann of ClimateCheck — is launching a "climate MBA" course this year. Going beyond the established "nuts and bolts" of emissions inventory accounting, Baumann explains, the accredited programme will target CEOs and CFOs in the hopes of "driving high-level commitment in order to drive more action."

At Best Foot Forward, Simmons will teach the company's first "carbon culture" course next month. "It's about raising employee awareness, using carbon in the decision-making process, and engaging the supply chain," he says. It's also tailored to finance. "When I speak to various people throughout a company, it's finance that usually gets it first," Simmons notes. "They have the accounting skills, they understand how to define boundaries, and they know how to collect, analyse and report data."

Despite their current workload, Simmons reckons deeper finance involvement will hasten the eventual development of truly useful carbon accounting. What's more, when CFOs bring CO2 onto the balance sheet, they add an "exciting new element to an age-old job."